Convexity Arises Because

question 3

Multiple Choice

Convexity arises because

• A)bonds pay interest semiannually.
• B)coupon changes are the opposite sign of interest rate changes.
• C)duration is an increasing function of maturity.
• D)present values are a nonlinear function of interest rates.
• E)duration increases at higher interest rates.

---

Definitions:

Long-term Interest Rates

Interest rates applied to loans or debt securities with longer maturity dates, generally over ten years.

Forward Interest Rate

An interest rate agreed upon today for a loan that will begin at a future date, used to hedge against interest rate fluctuations.

Zero-coupon Bond

A bond that does not pay periodic interest, but is sold at a deep discount from its face value and redeemed at full value at maturity.

Rate of Return

The returns or setbacks realized from an investment over a certain time period, expressed as a percentage of the initial capital invested.